Liberty Media Closes In On 50% Ownership Of Sirius XM

On November 29th Liberty Media (NASDAQ:LMCA) filed a Form 4 indicating that it had purchased an additional 1,880,000 shares of Sirius XM Radio (NASDAQ:SIRI). Liberty paid $5.2 million for the shares, or an average of $2.749 per share. Liberty has now spent a total of more than $1.5 billion to acquire nearly 656 million common shares since it began increasing its ownership stake late last year.

The percentage of common stock owned by Liberty, including the common shares underlying its preferred shares, now stands at 49.77%. Liberty also owns $11 million of Sirius XM 7% Exchangeable Notes. If one also includes the 5,866,666 shares of Sirius XM common stock underlying the 7% Notes, as Liberty has done in many of its filings, Liberty's ownership inches up to 49.82%.

Liberty's ownership percentage will remain a moving target as it waits for a decision from the FCC about its application for de jure control of Sirius XM. The ownership percentage will obviously go up if Liberty continues to make purchases. It could also decline if Sirius XM issues more shares as the result of Incentive Stock Options ("ISO") being exercised, 7% Notes being converted, for contributions to employee savings plans or for stock grants to employees.

In order to calculate the above Liberty ownership percentage, several sources of information were available. When Sirius XM issued its 10Q for the third quarter it showed 5,192,364,730 common shares outstanding at the end of the quarter. Since that time, the shares outstanding have increased by at least 29,550,342 shares from the exercise of options by insiders Mel Karmazin, Scott Greenstein, James Meyer and James Holden, which would bring the total to 5,221,915,072. This information is available from the Form 4s certain insiders are required to file. It is not known whether other non-insider employees were issued stock or exercised ISOs since they would not be required to submit similar filings.

Next, from a Liberty Schedule 13D, it is known that Liberty still owns preferred shares that can be converted into 1,293,509,076 shares of common stock. If/when converted, this will increase the shares of Sirius XM common stock to 6,515,424,148. The final piece of information comes from the recently reported Form 4 that shows Liberty common shares are currently at 1,949,291,236. If/when Liberty converts its remaining preferred shares, its Sirius XM common stock increases to 3,242,800,312. So, the ownership percentages on an "as converted" basis are:

3,242,800,312 / 6,515,424,148 = 49.77%

and, if the shares underlying Liberty's $11 million of Sirius XM 7% Notes are included (the way Liberty calculates its ownership):

(3,242,800,312 + 5,866,666) / (6,515,424,148 + 5,866,666) = 49.82%

As discussed above, these percentages are unlikely to remain static. Karmazin has been regularly exercising his ISOs this year. So far he has exercised 90 million options and it is reasonable to assume that he will exercises the remaining 30 million soon after they vest at the end of the month. Each time this occurs, the total outstanding shares increase and Liberty's percentage declines. Other Sirius XM executives have regularly exercised options and could also be expected to continue the practice.

In addition, it must be remembered that if/when Liberty does go to a majority position, there is a bonus provision in the 7% Notes that could motivate holders of the Notes to convert the Notes into shares. Currently the $550 million of Notes convert into 533.3333 shares per $1,000 Note, or a value of $1.875 per share. A straight conversion would add 293 million shares to the float. With the bonus provision, which is based on the date and the share price at the time of the change of control, this 293 million shares could increase to about 320 million shares.

Summary

At an investor conference earlier this year Karmazin stated that Liberty could continue to buy common shares that would place its implied ownership above 50% so long as its actual percentage of common shares remained less than 50%. Currently Liberty is less than 15 million shares from 50% ownership of Sirius XM on an as converted basis (or less than 12 million the way Liberty calculates it with its 7% Notes), although its actual ownership of the common shares is only at 37.33%.

Liberty's recent purchase was quite small, but the $2.749 average price was the second highest it has had to pay thus far. It is not clear whether Liberty will continue to buy shares as it waits for FCC approval, or, if it does, whether it will stop at 50% implied ownership or continue to buy enough shares to account for the potential conversion of the 7% Notes and future exercise of ISOs. Liberty's decision could obviously have a significant impact on the near term movement of the share price if it decides to go ahead and purchase an additional 200 million shares rather than purchase just under 12-15 million shares and stop below 50% implied ownership.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position, as well as some $2 and $2.50 January 2013 and $2.50 December covered calls. I may initiate (or close) a buy stock/sell option position in SIRI at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.

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